Ratio, as the name suggests, is a comparison between two numbers. In Finance, Ratio Analysis refers to a comparison of different items appearing in the books of accounts or financial statements to give a precise and understandable interpretation. The most common interest of most of the stakeholder, including the company itself is to assess the health of a company in terms of its revenue, its liquidity, the efficiency of operations, and profitability.`
Financial statements are generally insufficient to provide information to the readers or stakeholders at first instance on their own; the numbers shown in those statements required to be put into such a form or format so that stakeholders can havea betterunderstanding regarding different aspects of the company’s operations and its health in the expression given by the company. Ratio analysis is one of the methods a stakeholder can use to gain that understanding with. Further, it assists in major decision making for the top management to review lesser data as compared to the entire set of books of accounts.
It compares the company’s ability to earn or generaterevenue with its expenses so that it can arrive at a desired rate of return and recognise if there is any shortfall. It includes ratios like-
It measures the ability of a company to pay its day to day debt on time. It is an important ratio or test to determine the company’s ability to cover short term obligation and cash flow. It includes the ratios like-
Return on Investment orReturn on Assets measuresthe amount of return on investment concerning the investment cost. It is a broad measure of investment profitability. It includes the ratios like-
It measures how well a company operate their assets to generate income. It also signifies the time acompany takes to collect cash from the customer or the time it takesto convert inventory into cash that is making sales. It includes the ratios like-
It measures the company’s ability to make payments and pay off its long-term obligations to creditors. A balancedsolvency&leverage ratios indicate a more creditworthy and financially sound company in the long-term. It includes the ratios like-
These ratios help to understand the economic status ofthe stock of a particular public traded company. They determine the connection between the price per share of a company and its earnings, growth and assets, or we can say it helpsin indicating the value of a company. It includes the Ratios like-
We at Whiz Consulting have accounting experts who are specialised in identifying and calculating ratios and giving you in-depth in understanding your business financial performance.
The prime benefit of Ratios is - it simplifies complex accounting and Financial data into simple ratios to comprehend what and how the company is performing in terms of its efficiency, solvency, financial efficiency, etc.
The Ratios calculated over some periods facilitate if there is a trend in the movements of company operations. The ratio analysis report supports the management decision to prepare or approve the budgets for the future based on previous trends.
The similar Ratios calculated by the companies operating in a similar industry provides a better scope of inter-company comparison. It helps investors as well as the company to assess and review whether they are managing the company efficiently.